The Yen, payrolls, and the Oil price

US stocks wrapped their second straight week of gains, even if stocks slipped on Friday on the back of better-than-expected US Payrolls data. The good news is bad news/ bad news is good news when it comes to economic data is back in fashion again, and we expect this to continue. What is fascinating about recent price action is that according to Deutsche Bank, out of 38 asset classes, 35 of them posted gains in November. This is an unusual move, and it could mark a key turning point for markets after a torrid 2022 for stocks and other risky asset classes. The fact that US payrolls data was stronger than expected, but the S&P 500 only fell 0.1% on Friday, is also a sign that the market has made up its mind that the Fed will be more dovish in 2023, and that this recovery rally could have legs. 

A deep dive into the US labour market 

US non-farm payrolls were stronger than expected for November, with payrolls rising 263,000 in the month. The unemployment rate remained steady at 3.7%, and the Bureau of Labor Statistics said that there were notable gains in employment in the leisure and hospitality sectors, healthcare, and government. There were job losses in retail trade and in transportation. However, there are some troubling details in this labour market report, one that is all too familiar to us in the UK. The number of long-term unemployed people in the US is 1.2 million, which is approx. 20.6% of all unemployed people, according to the BLS. Added to this, the number of people not in the labour force who want a job is 5.6 million, however, these people are not considered unemployed because they are not looking for work. The number of people marginally attached to the labour force is 1.5 million. Thus, the number of people of working age in the US who cannot work, or who are not looking for work, is putting upward pressure on wages. US wage growth was 0.6% last month, which is way above the level that is associated with inflation at 2% - the Fed’s target rate. The long-term outlook is for wages to remain high. Although the JOLTS job opening survey shows that jobs openings have fallen in recent months, there are still 10.33 million job vacancies across the US, with 1.7 job openings per available worker. This is down from 2 openings per available worker, but it remains uncomfortably high. This is a key sign that sticky inflation, or core CPI could remain elevated for a long time. 

When the labour market pivots 

Of course, there is the other argument, the household survey of employment in the US is weaker than the establishment NFP survey. This is partly because the household survey counts one person with 3 jobs as having 1 job, while the establishment survey counts this as 3 separate jobs. If people are working more jobs to get by, this doesn’t suggest a healthy economy or labour market. Added to this, jobs losses were noted in retail and construction last month, two important cyclical sectors for the US economy. If they are showing signs of weakness, then this is a key sign that an economic slowdown is on the cards and that the labour market could soften in the weeks ahead. The question now is, when the labour market does finally soften, will bad news be good news for risky assets, or will bad news be nad news for risky assets? 

The dollar collapse, will it continue? 

We have been amazed by the resilience in risky assets of late. This year has seen some incredible macro themes, but it appears that some of these are starting to turn. The “Fed pivot” was given a boost last Wednesday, when Powell said that a 50bp rate hike was on the cards for next week. The market reaction was keenly felt in stock markets; however, it is also having a major impact on the FX market. The dollar index is down nearly 10% since its peak at the end of September, the DXY is now back at levels last reached in June. USD/JPY had one of its worst months in decades. This is a major reversal of the key dollar uptrend for 2022. As we move towards 2023, a weak dollar is good news for EM, EM bonds, sovereign bonds generally and for risk more broadly, especially US blue chips with overseas exposure. As we start a new week, we may continue to see a weaker dollar, however, after such a sharp decline in the buck in just two months, we will be watching to see if the weakness in the dollar persists, or if it has run out of steam. 

OPEC tries to stoke upward pressure on the oil price 

Elsewhere, there could be some upward pressure on the oil price next week, as the EU’s Russian oil embargo comes into force and after OPEC + said that it would continue with its oil production cuts through to the end of 2023, to the tune of 2% of overall global demand. We think that this is significant, especially since the market continues to price in the prospect of China eventually dropping its zero covid strategy and of a stronger than expected US labour market. Thus, a rising oil price, Brent is currently trading at $85 per barrel, could be the biggest threat to the Fed pivot in 2023. The oil price is worth watching this week, to assess if it will be a thorn in the Fed’s side as we move into 2023.